China’s economic policymakers expected to implement ‘more pro-growth policies’ after high-profile March meetings

  • China’s monetary authorities have already been supporting growth by cutting the reserve requirement ratio and by expanding access to credit for small businesses
  • Narrowing interest rate gap with the United States poses an economic risk to China, but Beijing has the tools to minimise the impact, according to analysts

As the economic policies between the United States and China continue to diverge, Beijing has an arsenal of tools at its disposal to cope with subsequent shocks, according to experts.

Among the concerns that could pose a risk to China’s economy, they say, is the narrowing interest rate gap between the world’s two largest economies and capital inflows.

These issues were thrust back into the limelight this week as finance leaders from the Group of 20 (G20) – the world’s top economies, including the US, China and some European nations – gathered for talks in Indonesia’s capital, Jakarta.

Pressing issues on their agenda include geopolitical risks posed by the Ukraine crisis; the need to revive a global economy that is still reeling from the impact of the pandemic; soaring inflation levels; and the tightening of monetary policies in some regions.

But some investment analysts say China’s policymakers have leeway in controlling the nation’s economic recovery and coping with uncertainties.

“Without significant inflationary pressures to consider, there’s plenty of room to provide support and keep the exchange rate more or less in its current band,” said Christopher Smart, chief global strategist at Barings, a global investment management firm.

China’s monetary authorities have already been signalling their intention to support growth by twice cutting the reserve requirement ratio (RRR) this year and by expanding access to credit for small businesses, while also considering tax cuts.

The People’s Bank of China has also lowered both loan prime rates and the interest rate on billions of yuan worth of one-year medium-term lending facility loans this year.

After March’s “two sessions” – annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference – “we believe there will be more pro-growth policies coming out, including both monetary and fiscal stimulus”, said Kelly Chung, senior fund manager at Value Partners, a Hong Kong-based asset-management company.

And while Chung expects real interest rates in the US to remain negative, even though its monetary tightening cycle is speeding up, she foresees China remaining in positive territory with its inflation under control.

Thus, she contends, there is little need for China to worry about the US Federal Reserve’s policy shift.

Lian Chia-Liang, head of emerging markets debt at Western Asset Management, a global fixed-asset investment firm, added that local debt in Asia, including China bonds, has caught the attention of global investors.

“From a valuation standpoint, it has an attractive attribute of enhancing portfolio yield,” Lian said. “Against a moderate inflation backdrop, Asian local currency debt, such as in China, Indonesia and India, looks attractive in real terms, versus Treasury securities in developed markets.”

Western Asset Management noted that, over the past two years, the risk-return profile of Chinese government bonds has been reinforced by increased investor flows and exchange-rate stability. And it remains systematically under-allocated, given the benefits of diversifying global portfolios.

Overall, the firm said, there are still headwinds for Chinese authorities to keep economic growth at around 5 per cent, and consumer inflation at around 2 per cent, while also striving to ensure that millions of fresh Chinese graduates can find jobs every year.

Carol Liao, China economist at bond fund giant Pimco, also cited the impact of the pandemic and the cost of China’s zero-Covid strategy.

“Growth has been hindered by energy market constraints and the weakening property market,” she said, while also pointing to China’s curtailed household consumption and its struggling service sector.

Meanwhile, she said, land-sale revenue and local government financing vehicles look to remain constrained by policymakers’ efforts to deleverage property developers and local governments.

“Nevertheless, the impact of rate cuts could be limited, as credit growth remains the most effective monetary instrument, and it is currently constrained by weak credit demands,” Liao said.

“We expect credit growth to pick up moderately in 2022 as authorities ease the credit supply and further normalise funding to the property market.”

Author: Kandy Wong, SCMP

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